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By what amount will the market value of a Treasury bond futures contract change if interest rates rise from 5% to 5.25%? The underlying Treasury bond has a duration of 10.48 years, and the Treasury bond futures contract is currently being quoted at 113-06. (Remember that Treasury bonds are quoted in 32nds.)
Morning View National Bank reports that its assets have a duration of 7 years, and its liabilities average 1.75 years in duration. To hedge this duration gap, management plans to employ Treasury bond futures, which are currently quoted at 112-170 and have a duration of 10.36 years. Morning View’s latest financial report shows total assets of $100 million and liabilities of $88 million. Approximately how many futures contracts will the bank need to cover its overall exposure?
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